Economist, Telegraph Columnist, Broadcaster

Don’t let Osborne tell you we’re out of the fiscal mire

George Osborne waited until the depths of winter to deliver his fourth Autumn Statement. Yet the Chancellor was still on the front foot. Buoyed by upbeat new growth forecasts, Osborne presented fiscal numbers much improved on those in his March budget. This UK recovery, though, is extremely fragile and may not be sustained. And our country remains deep in the fiscal mire.

Thursday’s Commons set-piece was a political triumph for Osborne. This was inevitable, given the better economic backdrop. The Office for Budget Responsibility more than doubled its 2013 GDP growth forecast to 1.4pc, up from 0.6pc in March. Next year’s prediction accelerates to 2.4pc, said the OBR, up from 1.8pc nine months ago.

This was the largest increase in growth estimates between UK fiscal statements for 14 years. So Osborne thumbed his nose at his critics, observing “Britain is now expanding faster than any other major Western economy”. This was even true – at least for a while. A couple of hours after Osborne spoke, the US announced an official growth upgrade.
Amid the blizzard of numbers released on Thursday, I’d like to highlight two. The first is £111bn – the UK’s “deficit”, or projected public sector net debt, in the current fiscal year. Yes, this figure is lower than the £120bn forecast in March, as the Chancellor stressed. Yet, at 6.8pc of GDP, the extent to which government spending will exceed revenue this year remains massive by historic standards. And, of course, each year’s deficit is added to the national debt that we must service with regular interest payments.
At the time of Osborne’s “Emergency Budget” in 2010, the projected deficit for 2013/14 was £60bn – which puts £111bn overspend in context. Far from a “breakthrough” or a “resolution” – words I’ve heard government members use in recent days – this number shows that our current fiscal predicament is, at best, slightly less terrible than before.
For all the talk of “determined consolidation” and “solving our fiscal problem” – again, phrases that pepper the ministerial vernacular – the UK will continue running hefty annual deficits for at least the next four years. Between now and 2017/18, even if the latest rosy growth forecasts are true, some £361bn will be added to our national debt – around £15,000 for every household.
By 2018, the Chancellor told us, “the UK will be in fiscal surplus”. Perhaps. But when a deficit ends that doesn’t mean your problems are over. Au contraire. It just means your stock of debt has peaked – unless you fall back into deficit the following year. By 2017/18, the fine print shows, our national debt will be £1,573bn – or £64,000 per household. That’s up from around £760bn in 2010.
This ballooning national debt, despite the rhetoric, isn’t surprising given that, while tax receipts are weak due to a slowing economy, the much vaunted government spending “cuts” have actually been pretty timid. Between 2010 and 2018, the cumulative real terms reduction in spending will be just 3.4pc, taking government outlays back to where there were in 2005 – and that’s if “austerity” is fully implemented.
No-one is saying some state programs haven’t been slashed and there aren’t instances of individual hardship. Of course there are. That will always be the case in an economy where government spending is so pervasive that it’s close to 50pc of GDP. The reality is, though, that for all the austerity talk, we’re half way through a process that will see our national debt more than double over 8 years. Remember, too, that these sanitized figures don’t include vast off-balance sheet liabilities such as public sector pension obligations, bank bail-outs and payments due under the private finance initiative.
Which brings me to the second data-point I’d like to highlight – 7pc. That’s the OBR’s new unemployment forecast for 2015. The fact that the jobless total is falling is clearly good news. Since 2010, as Osborne rightly trumpeted, the private sector has created three jobs for each post removed from the state’s vast payroll.
The better growth outlook means that UK unemployment is set to fall from 7.6pc today, to 7.1pc in 2014 – down from an 8pc forecast in March. The year after, joblessness falls to 7pc, the OBR now says, then down to 5.6pc by 2018.
I’m focusing on 7pc because that’s the unemployment rate recently identified by Bank of England Governor Mark Carney as the threshold at which the Monetary Policy Committee will “consider” raising interest rates from their current record low. In other words, the downside of an improving economy is that the date when the MPC starts imposing higher borrowing costs moves closer – bad news for millions of debt-stretched households.
Personal debt in the UK just reached a record high of £1,400bn, or 90pc of GDP – which, given falling real wages, goes a long way towards explaining our recent growth surge. Average household debt is £54,000 – more than twice what it was a decade ago. Yet rising interest rates could upend the finances not only of millions of UK families, but the government’s finances too.
State borrowing costs are currently ultra-low, thanks to the Bank of England buying-up swathes of gilts with printed QE money. Even under these unique circumstances, the British government is spending more on debt service than on defence. Were gilt rates to rise above a still relatively low 4pc, the government would then have to allocate more to interest payment than it spends on education.
So let no-one tell you that the UK’s fiscal problems are “solved” – or that we can afford to significantly “loosen the purse-strings”. The economy is improving, yes, but our current stability rests on interest rates that cannot last. The real danger isn’t that the Bank of England acts too soon to raise rates. The nightmare scenario is that, in the end, the MPC’s hand is forced by market mayhem resulting from a messy “monetary unwind”, either here or in the US, given the grotesque extent to which the Anglo-Saxon world has relied on QE.
While this Autumn Statement was largely a “macro” story, there were some eye-catching specific measures. Osborne deserves credit for cutting employer national insurance rates for workers under 21. Raising the state pension age to 69 for today’s under-40s was also laudable, if inevitable – but needs to happen faster.
One regrettable move, in my view, is the near-tripling of residential stamp duty revenues between now and 2018/19. Across the UK, the average stamp duty paid by house buyers will jump from 2.2pc to 2.9 per cent, the Autumn Statement shows, as thresholds are fixed and more and more buyers are dragged into higher brackets.
Residential stamp duty receipts are set to balloon from around £4.5bn to £14bn by the end of the decade. It is absurd, at a time when the Treasury is trying to encourage home-ownership, that this tax applies to the entire purchase price, once a threshold is crossed. No other tax works on that basis. This egregious levy on family aspiration and financial independence should surely be re-thought.
The shape of this UK recovery also concerns me. Recent growth stems almost entirely from higher consumer spending, funded largely out of savings and credit. Household consumption this year will rise 1.9pc, compared to the 0.5pc forecast back in March. Fixed investment will fall 2.5pc, though, in stark contrast to an estimated 2.2pc expansion nine months ago. Net foreign trade actually detracts from growth in 2013, the Autumn Statement predicts, while adding nothing next year.
Investment and trade – these are the sources of a genuine recovery, the kind that will allow us to tackle our budgetary woes, and grow our way out of the fiscal mire. The Chancellor is on his front foot, but the actual economy looks imbalanced.